Refinancing Isnt Always The Answer To Finding Fast Cash

The debate over refinancing

Although advertisers talk about refinancing, it isnt always a sure-fire way to find fast cash. Anyone who is thinking of refinancing needs to think about the pros and cons to the move. People who are chronic refinancers and jump on the lowest interest rates dont always benefit in the long run. They have a long list of fees and closing costs that can add up and eat away at savings.

The real reason for a refinance

The first thing a homeowner should figure out is what their goal is for the potential refinance. Consumers need to be warned that refinancing doesnt pay off debt, it just reorganizes it. Sure it is normally at a lower interest rate, but there are other variables that change to accommodate that change. Variables can chip away at savings. Reducing monthly payments is the typical reason behind refinancing, and debt consolidation is the second. According to Holden Lewis, economist for Bankrate.com, Consumers need to talk to a professional to do the numbers and find out if the goal really is worth it. Getting rid of debt is a great thing, but if the rate cuts down on income drastically, it may not be the best option.

When to refinance

After honing on the reason a consumer wants to refinance, the next thing to decide on is when. The Bankrate 2008 Closing Cost Survey indicated the national average on closing costs for a $ 200,000 loan was $ 3,118. Of course, that is on top of taxes, interest, association dues, and insurance. Consumers need to remember that getting a lower interest rate extends the length of the loan and, in turn, can cost more in interest. For instance, a mortgage with 20 years left out of 30 will result in a higher amount paid in interest over the lifetime of the loan, and perhaps a larger interest payment if refinanced. There are two calculations to follow when trying to find fast cash from refinancing:

1. One calculation where the new loan has the same term as the old loan
2. One calculation where the new loan is the length of the planned refinance

From there, consumers can compare the interest savings to see if refinancing reaches their financial goals.

When you shouldn’t refinance

There are specific instances when a refinance will not help. A homeowner that doesn’t plan on retaining a home for long, for instance, would potentially be better served by staying in the current mortgage. Considering the number of months of savings they need to recoup closing costs, it may take longer than they plan on living in the property. Also, people who are underwater with their mortgages most likely should stay with their current mortgage. Its highly unlikely a homeowner in an underwater position will find a lender.

A further reason not to refinance are prepayment penalties. The penalty payment is another expense for homeowners to add into the total cost of the refinance. Homeowners would be better served by waiting beyond the initial two or three years when the prepayment penalty is active. Most likely consumers will have a better chance of refinancing further down the road.

What’s good about refinancing

Despite the tricky calculations regarding refinancing, it still can benefit many homeowners if done in the right way and at the right time. Refinancing can help consumers find fast cash if they are smart about making the decision. A financial planner or online banking tool can assist people make the right decision over refinancing or not.